Paper Money vs. Gold Money

In 1913 the US took a big step away from gold when it
authorized the Federal Reserve to issue paper notes that were
only 40% backed by gold while claiming they were fully convertible.
This fell apart when people
tried to exchange their paper money for gold in 1933.
Instead of admitting the central bank was bankrupt,
the government confiscated everyone's gold, made it illegal
for them to hold gold, and devalued the paper to $35 per oz of gold.
At Bretton Woods the US agreed that central banks around the world
could redeem $35 US for 1 oz of gold.
As countries tried to exchange their dollars for gold
it became clear US did not even have enough
gold to back the dollars returning from overseas.
Instead of admitting the central bank was bankrupt,
the US said it was "closing the gold window".
In reality this was stealing from billions of people.
By the time the dollar:gold ratio went from 35:1 to 800:1
the government was able to stabilize the dollar by buying
up dollars using gold and raising interest rates to 20%.

"I'm not upset that you lied to me, I'm upset that from now
on I can't believe you" - Friedrich Nietzsche

Even though the US dollar history is like a dishonest
Goldsmith Banker issuing more receipts for gold than he has gold,
central banks around the
world continue to hold US dollars as reserves.
The US continues to print more, stealing value from countries
around the world with each new dollar printed. It is fundamentally
unfair for the US to get real wealth from billions of poor people
around the world in exchange for giving them pieces of paper,
and then to devalue those pieces of paper by printing more all the time.
As other countries realize they are being ripped off because they are using
and holding dollars they will reduce their exposure to dollars.
When central banks do this they call it
diversifying reserves.
As this happens the value of the dollar will crash.

Paper vs Gold - US 38 Year Cycle

If history is any guide, the US dollar will be devalued very soon.
There is a cycle of paper money vs gold cycle starting from back when
sticks were used as money in England.
This started before America was an independent country but continued in America.
The cycle is about 38 years long.
Each time paper money drops in value and there is an economic/financial
collapse while gold increases in value. This has taken place like clockwork.
By this clock the dollar should be devalued very soon.

Below we take a brief look at the history of this cycle and then look
at the current situation.

1781 = 1742+39

By the end of The American Revolution hyperinflation made the Continental
Currency worthless.
In order to save the new union of American nation-states
from financial collapse, the Bank of
North America is founded by the
Congress of the Confederation. The
Netherlands and France loan this new central bank physical gold and
silver which was then used to back a new currency.

1819 = 1781+38

Public debt increased from the
War of 1812,
and the
Louisiana Purchase.
The government created the
2nd Bank of The United States in 1816
which started printing money.
Then a couple years later the new central bank contracted the money supply.
The government was short of gold to pay banks it had borrowed
money from. Since it could not pay the banks in gold, it said
the banks did not have to pay their customers in gold (even when
contracts said they did). This meant banks could print
notes without worry about having to back them. This led
to the
Canal Craze Bubble
and then the
Panic of 1819
when it became clear there was not enough gold to back all the paper.

Since there was not really enough gold
to back all the paper money (only 40%),
some people and countries started getting out their gold
while the getting was still good.
Rather than admit the Ponzi gold scheme had failed,
in 1933 President Roosevelt confiscated private gold and no longer let people exchange paper
money for gold or own gold. When they took people's gold they paid them
$20.67 in paper and then shortly after raised the price to $35/oz (so
they really paid people $0.59 for every $1 worth).
Foreign countries could exchange gold at $35/oz and for awhile after
this gold flowed into the US.

If the government had not outlawed gold, more and more people would have turned in their
paper dollars for gold coins until the Fed either ran out of gold or closed up. At this
point the remaining paper money would have rapidly become worthless. This would have
been a 3rd period of hyperinflation in American history. Along with the Revolution
and Civil War, with between 70 and 80 year spacing. If the US gets hyperinflation
in the next few years it should really count as America's 4th hyperinflation, with similar spacing.

1971 = 1933+38

With the Vietnam War
and the Great Society
the US had been printing money again. Other countries were quickly
exchanging their paper
US dollars
for US gold, as it was clear there was
not enough gold to cover all the paper at the $35/oz price.
To keep from running out of gold
on August 15, 1971 President Nixon removed the dollar from the gold standard.
This violated the US commitment in the
1946 Bretton Woods System to redeem $35 US dollars for 1 oz of gold,
and a defaulting or bankruptcy really.
This, and more printing, reduced the value of the dollar around the world,
leading to the inflation of the 1970's and the
1973 oil crisis
where oil prices went up by a factor of 4 to compensate for the
dollar going down by a factor of 4.
After the price of gold went up several times
Fed sales of gold were able to keep
the price from going up further and so support the dollar.
At the new higher price for gold the dollar sort of had a fuzzy backing in
gold.

In the last 12 months the US government
has
spent $2 trillion more than it took in and printed over $1 trillion.
Before this the record deficit was about $0.5 trillion and most of that was
borrowed not printed. With this much printing, fewer people are willing
to lock their wealth in US dollar debt. When the government can not
borrow as much, it will print more.

The people that are still buying government debt are buying short term debt.
This means that if interest rates go up the interest payments on the
US debt will go up. In the past much of the debt was in 20 year and 30
year fixed rate bonds, but not so much these days.
Many of the US consumers have variable rate mortgages.
As interest rates go up their payments will go up. This will lead
to more defaults. These two problems keep the Fed from letting
interest rates rise. But keeping them low means more money printing.

In each of the above American economic collapses there was
too much paper money for the amount of gold and people lost confidence
in the paper. Today the US paper money dwarfs the US gold.
In 1895 the government could be saved with $65 million in gold,
today all the US obligations are more like $65 trillion, a million
times higher.

Those who cannot remember the past are condemned to repeat it.

"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement: and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." -
George Santayana

"Insanity in individuals is something rare - but in groups,
parties, nations and epochs, it is the rule."
- Friedrich Nietzsche

Related Phenomena

Barry Bannister has noticed a cycle in the ratio of stocks / commodities
where it goes up for 15 to 20 years
and then down for 15 to 20 years.
In fact, some of his transition points, like 1933 and 1971, are the same dates
used in this article. So a pair of his up and down cycles seems to line up with
the 38 year cycle discussed here.
This makes sense, because people trusting paper money also trust stocks,
and people wanting gold also like commodities.

The theory of
Generational Dynamics has cycles about twice as long as mine.
Also see blog.
The idea is that the elders of any generation have learned wisdom through
experience which helps them to govern society and keep it on the
most productive course. As the elders are replaced by the next
generation a vast pool of knowledge is lost.
Mistakes of old are then repeated anew so lessons can be learned again.

The
Schwartz Hypothesis
that price instability due to monetary policy
causes financial instability fits well with America's historical record.
It is tested against many of the same events covered in this article.

The government and Federal Reserve have been
able to keep economist saying
that government printing money makes the economy grow.
The truth is the US economy was more stable and grew faster before
the Federal Reserve.
By printing money the government takes wealth from everyone who
has dollar savings, so it helps government grow faster. This is the
Inflation Tax.
The US was able to extract a moderate Inflation Tax from
people all around the world for the last 38 years.

If there are $6 trillion dollars outside the US and the US inflates the
money supply by 10% it has stolen $600 billion from these people outside
the US. This is about the level of the
US military budget. So a case can be made that the US inflation tax
on the rest of the world pays for the US military which can then
dominate the world.

It would be a mistake to assume that since the
Roman dinar,
the
Spanish reale,
and the
British pound
each took many years to lose reserve currency status that the dollar
fall will be slow. Back then they did not have instant worldwide information
flow, computers with automatic trading software, etc.
While it would be wrong to say that
This Time Is Different,
the collapse will probably set a new speed record for reserve currency collapses.

The US ability to quietly take wealth from dollar reserves all around the world
was like the
Golden Goose.
But now they have pushed too far and that golden goose is going to die.

People or countries do not pay any inflation
tax on their gold and silver holdings. This is where the frog is free.

US Dollar Multi-Level-Marketing Scheme

When the US government prints money they get the money they printed.
The more countries that use the dollar, the more victims they have
to steal wealth from when they print money. The more victims
they have the more they can print without causing so much
inflation as to really bother people. So the more victims the
better.

But what is in it for other countries that peg to the dollar? What
is their angle or incentive to peg to the dollar?
In the Caribbean we have the
East Caribbean Central Bank
that produces the
East Caribbean Dollar
which is pegged at 2.6882 to the dollar.
This uses an
Orthodox Currency Board.
When they print EC dollars they
exchange them for US dollars and then buy
short term US treasuries. In this case
they always have enough treasuries that they could
convert all EC dollars back to US dollars. So the EC dollar can
be fully backed this way.

Now the fun part is that the central bank gets to keep any interest they earn
on the treasuries. Also, as dollars come flooding into the
Caribbean they will get to print more EC dollars and increase the
number of dollars they earn interest on (though probably they are
worth less each).
So the interest the bank earns on the reserves is
the "cut" or incentive they get by pegging to the dollar.

When the US holds interest rates down at 1% and the dollar is dropping
in value more than that most years, it is much less fun for
the other central banks to peg to the dollar than when it was at 5%.
If the orthodox method is costing them their nest egg of reserves,
they have to look for non-orthodox methods.
And watching gold go up in value much more than 1% per year for
the last 10 years starts to make the 1% US bonds look foolish.
In general with such low US rates, central banks would be better off to
leave the US dollar MLM scheme and do something else.
They can change their pegs to
another currency or basket of currencies where they can earn more
interest, or buy gold which is going up in value.
Organizations often do what is in their own interest.

Easy Money in Reserve Currency Home Country

Imagine that $1.5 trillion in new paper money each year was
just mailed out to the 129 million households in the US.
This would be about $1,000 per month per household.

Now assuming people around the world still used dollars as their
reserve currency and the international trading currency, what would happen?
People in the US would on average have
more money than people in other countries.
People in the US would import lots of stuff from other countries.
People in the US
would be less motivated to work and want higher wages when
they did work. People in the US would spend more money.
The US would have a trade deficit as money flowed out to buy
stuff from other countries.

Because of this jobs that could be done in another country
with cheaper labor would migrate to other countries. So
manufacturing jobs and even some engineering and software jobs
would go offshore. Only service jobs, that could not relocate,
would stay in the US.

There is actually a precedent for this sort of thing.
When Spain was taking gold from the New World they were
making lots of new gold money. The result was that people
in Spain bought more stuff from outside Spain, etc.

When the US makes new money and spends it on Americans it
has the same net effect as if they had just mailed it out to people.

Replacing the dollar

A common claim is that, "There is no credible substitute for the dollar,
so the dollar is safe as the reserve currency." Another claim
is that it would take decades to replace the dollar. Central banks
need to have some assets that hold or increase in value.
The dollar is not doing this, so in truth almost any other
of asset is a better reserve than the dollar. There is no
need to just pick one or for every central bank to pick the same one.

Imagine that central banks currently had their assets as
60% Dollars and 30% Euros.
If the value of the dollar were to drop in half, then
they would have equal value in Euros and Dollars without changing
anything.

For thousands of
years gold and silver have been used as a store of value.
Imagine a central bank with 10% in gold and 90% in dollars.
If the dollar goes down by 2 and gold up by 5 it could
suddenly have most of its assets in gold.

The point is that the dollar could be replaced as the dominant
reserve asset even without central banks ever selling their dollars,
just by dropping in value. Several times in the past the dollar has
dropped significantly in value in a just a few short years.

Currencies pegged to dollar do not have to keep buying dollars

The only substantial way to support the US dollar now is for central banks
in other countries to buy dollars, since the US does not have significant
reserves. People incorrectly claim this is enough, since "all the countries
that have their currencies pegged to the dollar are forced to keep buying dollars".

The way an
orthodox currency board
pegs to the dollar,
as explained in the
US Dollar Multi-Level-Marketing Scheme,
is to print more of the local currency and buy dollars if the local
currency gets too high, and use the reserves of dollars to buy up
local currency if the local currency gets too low.
When they print local currency and buy up dollars they take on
the inflation problem that the US should have had, so they
have let the US export inflation.
However, there are always non-orthodox options for pegging a currency.

One option is to change the peg to some other currency, like the Euro. Another
option is to peg to a basket of currencies, like Kuwait does.

Another option is to keep the peg to the dollar, but instead
of buying dollars to buy gold. If gold holds value better
than dollars then the value of the reserves will be higher
than needed. However, if the price of gold in dollars
goes down, then the bank would not have enough reserves
to fully back the peg. If the central bank was very confident
that gold was going up, or the dollar was going down, they
could decide to at least partly buy gold instead of dollars.

Pettis makes a related claim
when he says says, "It would be astonishing if, under these circumstances,
total Chinese holdings of USD assets declined, and of course it is impossible
that they declined faster than the willingness of other foreigners to replace them."
There are a couple flaws with his logic. First, foreigners could cash in their
holdings as their short term treasuries came due. Since most are short term now,
foreign holdings could decline very fast. The Fed would print money to cover each
bond that came due. The second is that the Fed could buy them directly instead
of another foreigner.

A country that had more reserves than it needed to back its currency, maybe because
its gold reserves went up in value or because it devalued its currency, could use
some of its central bank reserves. This does increase the risk that if its
reserves drop in value it might not be able to maintain the exchange rate peg
that it was, but it is not impossible to use the reserves, as Pettis claims.

While this is sort of true on a theoretical level, it overlooks
important practical reasons that people want to have their reserves in the
currency they buy things in. Imagine your reserves are in dollars
but you buy things in gold. If the price of gold measured in dollars
doubles then the buying power of your reserves is cut in half.
You have a big
currency risk
if you don't have your reserves in the same currency you trade in.
It is easier and safer to plan for the future if you are saving in
the same currency you are spending in.

The other big issue is that if oil is priced in dollars then the US can
buy as much oil as it needs to import by just printing more dollars. This is
on the order of $500 billion per year if oil is at $70/barrel and
$1 trillion/year if oil is at $140/barrel. Imagine oil and other
international commodities were priced in gold and nobody accepted
dollars for international trade. In that case the US would need
to export enough extra stuff or use up their reserves of gold to
buy oil. In this case the demand for dollars and their relative value would
be far lower than it is today.

Having global trade priced in dollars makes the demand for dollars
as reserves much higher, and so their value much higher, than it would be otherwise. And it makes it far easier for America to pay for imports.

US in a world of hurt when dollar loses reserve status

Any other country that wants to import things has to have things
it exports to make the money to buy the imports. Because the
US had the international reserve currency it could buy things
with newly printed money and did not really need to export goods.
So it does not have enough exports to earn the money for the
imports it needs. At some point (not clear when) the other
countries are going to realize that
this is not fair and no longer accept dollars for real goods.
When this happens the US will have a very hard time paying for
the oil and other real goods it needs.

Three Bubbles and You're Out

When the Fed blows a credit bubble it impacts the whole world.
The Fed inflated three bubbles in just over a decade, each
much bigger than the last.
We have had a stock bubble, a real estate bubble, and now a
bond bubble. When this huge bond bubble
pops, I think it will be a "three bubbles and you're out"
situation. The world will be fed up with the dollar.

A bubble pops when the supply of the asset becomes sufficient to
overcome demand and lower the price. So in the Dot Com bubble there
were lots of new companies selling shares. In the real estate bubble
there was huge production of new houses. In the bond and dollar bubble
there is
record junk bond sales
and
huge production of new dollars in QE2. At some point
this supply will be more than the demand and the value will plummet.

There are those who think gold is a bubble. Gold production only
increases the world total holdings of gold by about 1% per year.
So while gold prices can go down, they don't have the usual
dynamics of production increasing till it overwhelms demand and pops a bubble.
It is trivial for the Fed to increase the number of dollars by 10% in one year
but it is nearly impossible to increase the amount of gold by even 2% in one year.
So it is far easier to pop the dollar than to pop gold.

There is just no way that a 30 year bond at 4% is a good
long term investment when they are printing more than
a trillion new dollars each year. This bond bubble will pop.

Let me speculate about when the bond bubble will pop. For the last
30 years interest rates have been going down which has increased
bond values.
I think the bond bubble will pop when interest rates start going
up and bond values start dropping. So when will that be?
Probably when inflation starts going up. So when will that be?
Probably after the dollar starts going down. So when will that be?
Don't know, but it could start anytime now.

The original Keynesian theory is that the government should print more
money and spend more money during bad times but contract the
money supply during good times. This is a
countercyclical policy.
In real life governments find it very hard to run budget surpluses
in the good times to pay down the deficits from bad times,
and few do that.
Now the
Post Keynesian Economics Theory, like the
Neo-Chartalism
think that printing money all the time is good. They go so
far as to claim all growth is from government printing money.

Unemployment and printing money

The Keynesians say that printing money reduces the unemployment.
From page 9 of "The General Theory" we read, "Now ordinary
experience tells us, beyond doubt, that a situation where labour
stipulates (within limits) for a money-wage rather than a real
wage, so far from being a mere possibility, is the normal case.
Whilst workers will usually resist a reduction of money-wages,
it is not their practice to withdraw their labour whenever there
is a rise in the price of wage-goods."
In effect he is saying that when the demand for labor shifts
lower it is easier to trick labor by reducing the value of money than to
lower peoples wages.

If government has a minimum wage rate
that makes it so employers can not make money off
some people at that rate then those people will be
unemployed. Most people think the minimum wage law is
helping people, so one should never expect the government to
admit that the
minimum wage law causes unemployment,
but it does. In a similar way, mandated health care, higher taxes,
more regulation, carbon taxes, etc. cause unemployment.

It would
be far easier on society if they would just
lower the minimum wage rate; however,
politically that is much harder to do.

Today many benefits, salaries, and wages are indexed to inflation.
So this does not work nearly as well as it used to. It also does
not work so well because many countries, like China, have their
currency pegged to the dollar, so as the dollar goes down so do the
other currencies.

Aggregate Demand vs Bubbles

Keynesians think that printing money stimulates demand and so
the economy. To the extent that printing money does
what Keynes theorized, it does it by inflating things
and reducing real wages (see previous section).

However, people know inflation hurts them and don't want
inflation. In fact, the
Misery Index
is defined as the sum of the inflation rate and unemployment rate.
Part of the law governing the Fed requires that they maintain stable prices.
So at any sign of
inflation, say oil at $140/barrel, causes the Fed to contract
the money supply. So if the extra money causes inflation
the extra money is cut off. So the extra money can only keep
flowing as long as it does not go into things the
Fed measures as part of inflation with the bogus CPI.
So in the US printing money can't really lower the real wages
the way Keynes was thinking.

It is much easier for the extra money to keep flowing if it goes into stocks,
or foreign investments, or gold, or oil, or anything
that is not currently in the CPI.
So
taking housing out of the CPI during the bubble
helped let them keep printing money.

Chartalism and Modern Monetary Theory

It is often useful to be able to look at problems from a totally
different perspective. If you can understand a different way
of thinking about a problem then you have a better and deeper
understanding. I think MMT is a very different way of viewing things
that is worth some effort to understand.

Chartalism is older than Keynesianism and is in fact mentioned
favorably in the first few pages of Keynes 1930 book,
"A Treatise on Money".
The name "Chartalism" derives from the
Latin charta, as in chart, paper, or writing.
Chartalism advocates paper or fiat money.
Even back in the 16th century there were debates between
Metalists vs Anti-metalists or Chartalists.
The "Modern Monetary Theory" or MMT is a modern Chartalism,
so I have them both in the same section here.
MMT is attempting to describe the real monetary system in use
since any tie to gold was dropped in 1971.

The
MMT economists point out that a sovereign government that issues
its own fiat currency is never really revenue constrained or insolvent.
It can always print more money.
The government may have setup rules to limit the
printing of money, but
those rules could be changed or ignored
by the same
government. To think about the big picture of what is going on we can ignore
the details of the current self imposed constraints.
In fact, MMT guys view the creation of fiat money as part of "the government"
even if the current rules claim it is not (they hate the term "printing money").
A government that can make fiat money is very different from a normal
household that clearly goes bankrupt if it spends more than it
takes in for too long.

Since the government can make all the money it wants, the government could
operate just fine even if it burned all the money it collects as taxes or from selling bonds.
You can also just define the money supply as money outside government so that it
is as if it was destroyed when it goes to the government.
In
the MMT view, the reasons for taxes are to provide demand for the
fiat money and to reduce aggregate-demand/inflation.

Similarly, the government selling bonds is not really to raise money,
but to temporarily reduce aggregate demand to help control
inflation. It is the equivalent of taxing people now and then later issuing
them a stimulus check. So the net effect of a bond, or a tax and then stimulus
check, is to temporarily reduce aggregate-demand/inflation.

Another way to look at government bonds is to compare them to
private bonds. If we imagine that the government burns the money
it gets from a bond sale but a private company spends it, then
to the extent that savings goes into government bonds,
instead of private bonds, it reduces aggregate demand.

In this view debt is not such a feared thing because
clearly the government could nationalize the central bank and
wipe out the debt by printing as much money as needed.
Also,
if the government runs a surplus it reduces the money supply
and could cause a recession.
In fact some would rather not have the government issue any bonds but simply
make the money it needed.
Some argue that in reality the government is not going to tax our
grandkids to pay back the debt, they are going to just create money
to pay it off.
Some view the selling of bonds as a holdover from
before the time of fiat money and something that should come to an end.

So the only limiting thing on government spending is really
just the danger of inflation.

The MMT guys view money as being created by government deficit spending.
Since governments essentially never pay back debts to the central bank,
this is correct.
They also say that
government deficit spending allows private net savings increases.
This is true in nominal terms.

To me the above parts of MMT are just another way of looking at what is
the reality of governments with fiat money. It focuses on nominal
amounts and not adjusting for inflation but mostly it is just a different way
of talking about things, but not really different. Again,
I think it is good to be able to see things as MMT people see them.

However, the MMT guys then go on and have some real differences. They
look at the equation of MV=PY or total money supply times velocity
equals price level times GDP and then say total money supply does
not impact prices since velocity can change and GDP is not constant.
Well, there can be a little bit of change in velocity or GDP but we have
seen government spending going from millions, to billions, to trillions,
so price levels have gone up.
They also think
that there is some full employment level and if the government adds
money so all the stuff produced at this full employment level is
purchased that it will not cause inflation, but if they go over that
level then it causes inflation. Thinking that there is some
abrupt change at a particular spending level seems silly.
It is not so discrete, much more continuous.

The MMT guys think that with floating exchange rates countries do not
need reserves. There are some big problems with this view. Outside
the US, which as the international reserve currency is a special case,
other countries
all feel they do need to keep reserves. Part of the reason is they need to be
able to buy oil and other international commodities,
without which life in their country could become very hard.
The reason many Asian countries have such high reserves now is because
they experienced the troubles that not having high reserves can cause
during the
Asian Financial Crisis.
Reserves are an important part of stabilizing a
currency and economy.

The MMT guys seem to make a big deal out of the fact that most money
is just computer entries and never really printed.
I don't think it matters if the money is really
printed or just an entry in a computer. If everyone with entries
in the computers went down to a bank and took out their money, then
the Fed would have to really print the money. This might take weeks
or months, but the Fed would print the money listed on the computers.
So the fact that they have not yet printed it makes no real difference.

In the end the Chartalists and MMT guys both favor
fiscal stimulus
for any problems.
So their main conclusion is the same as the
Keynesians.
The difference is that Chartalist/MMT guys favor fiscal stimulus
even when there are no problems while Keynes thought the government
needed to run a surplus in good times. So in some sense they
are even more in favor of printing money than Keynesians,
and I will lump them in with other Keynesians from here on.

Imagine the government payments are supporting 40% of the population,
either as employees or welfare/foodstamps. Further imagine
that half of that money the government spends is newly printed money.
Then if the money they print becomes worthless
they can not support that 40% of the population in the lifestyle
to which they have become accustomed.
The "liabilities" of a government are not just amounts of currency.
We call this type of bankruptcy
hyperinflation.
This happens to governments all the time.
Once this starts with the dollar it is probably
less than 2 years till the end of the dollar.
To help MMT folks everywhere I have written up
hyperinflation in MMT terms.

A government that prints money has a very different type of bankruptcy
than a household,
but not as far different from a corporation. As long as
a corporation is doing well it can create and sell more shares
of stock, which are like the currency for that corporation.
However, when things go bad the currency for that corporation
becomes worthless and it can not get any more money by making
any more shares. Same thing when people lose confidence in
a government currency.

MMT is mostly a different way of looking at things. In that
spirit I suggest the following.
Think of governments that issue currencies like corporations
issuing shares.
A government tax creates a demand for currency (MMT view).
Imagine the company never pays a dividend and only does share
buybacks to create demand for their shares (common these days).
In this case the goverment currency and corporate shares are really
very similar.
A company or a government has 3 choices to raise capital:

Make-profits or collect taxes

sell bonds

issue more shares or currency

As they make more shares/currency they dilute the ownership of all previous
share/currency holders. If they dilute too much or too fast, then
shareholders or currency holders will run away.
They can extinguish shares or currency by buying shares or
forcing people to turn over currency to pay a tax.
If the are spending far more than they take in and have huge debts
then it is not good to own those shares/currency,
because they are not able to provide enough demand.

Hyperinflation in MMT terms

Hyperinflation is a real phenomenon in fiat money that has happened over 100 times,
so it should be explainable by any good theory of fiat money. I have yet to see a full
explanation of how hyperinflation starts and why it is so hard to stop
in MMT terms. Nobody chooses to have hyperinflation, yet it happens over and
over, so it is important to understand the how and why of it.
To try to help with this I will here attempt to explain hyperinflation in
MMT terms.

In MMT the government uses taxes to provide a demand for the currency and both taxes
and bonds as tools to manage aggregate demand and inflationary pressures. In a nutshell,
in hyperinflation these two tools fail, inflation gets out of control, and the desire for
the currency drops off.

Imagine a government that keeps inflation under control by
suppressing aggregate demand with
bond sales and taxes each equal to about 1/3 of government spending.

Next imagine that bond holders move into short term bonds,
and then bond sales drop off.
At this point, the government could either cut back spending,
create more fiat money, increase interest rates, or raise taxes.
Some call the point where it
might still be possible to avoid hyperinflation the
Havenstein moment.
The government has so much
debt that trying to improve bond sales by raising interest rates
is very painful with the higher interest payments,
so that option does not look good.
The rules/obligations/politics of the government
make it far easier to create more fiat money than to really cut
spending or increase taxes enough.
It is almost like there is no real choice and it creates more money.
As they print more money less people want to buy bonds.
If bond sales go all the way to zero then the total fiat money creation
per year
will have to double and the aggregate demand suppression will
have been cut in half.

Now as inflation is going up the taxes people are paying on
last years income are not as large in real terms, and the
economy may be in trouble, further reducing taxes.
So taxes are not suppressing aggregate demand as much as they used to.
With no bond sales and reduced taxes, the government would
have to more than double taxes to get aggregate demand down to
where it used to be. However, this is just not possible.
More and more people are
in hardship because of the high inflation, so demands on
existing government programs are going up.

As people get worried they move from long term bonds into
short term bonds.
If the bonds are mostly short term they can come due very fast,
so the delayed aggregate demand all shows up suddenly.
If you think of government debt as a dam holding back demand,
hyperinflation can start when this dam breaks.
At this point
people are all rushing to spend their money before prices
go up any further, which shows up as an increase in aggregate demand
and higher velocity of money.
People and companies are in a panic.
However, the government is forced to make more fiat money
(probably just adjusting account balances and not real paper)
because of all the safety nets etc.
It has to make fiat money to cover the full deficit and all of the
bonds coming due. The bonds coming due in one year could be
several times the total taxes, so it is not possible to increase
taxes enough to destroy money fast enough to make up for the
new money from paying the bonds.

In the MMT view taxes provide demand for a currency. But in hyperinflation
taxation has problems. First, imagine there is a 25% income tax but you
pay it 4 months after the end of the year. If your salary is going up
with inflation at 100% per month then by the time you pay your taxes it is
like nothing. Also, as more and more of the economy is in the black market,
it is not taxed. The inability to tax means the inability to provide a
demand for the currency.

The
hyperinflation feedback loop runs out of control.
After this goes on for awhile nobody uses the local currency
as a "store of value" any longer. And awhile longer and
nobody will accept the currency for anything.
This is hyperinflation.
This is bankruptcy for a government that can print all the
fiat money they want.

Common Errors in MMT

MMT folks say, "When inflation starts the government simply has
to increase taxes and thereby destroy more money".
For regular inflation this statement is simple and true;
however, for hyperinflation this statement is clueless and foolish.
But MMT people don't usually understand the difference between
regular inflation and hyperinflation.

If people stop
buying the government bonds then suddenly the government has to
print new fiat money to cover the whole deficit as well as all the
bonds that come due. If bonds are short term it is easy for this
to be several times the existing taxes per year. It is simply
not possible to increase taxes sufficiently to destroy money fast enough.
Most MMT people just don't get this.

Another common MMT error is, "solvency is never an issue for a government
that issues its own currency". At the end of hyperinflation a government still
issues its own currency, but nobody will accept it as payment for anything.
So this claim is clearly not true.

Another error MMT people make is something like,
quantitative
easing is just swapping bonds for bank reserves, it is not
printing money. Again, MMT people think accounts on computers
are different than accounting done with physical paper.
If a bank requested to withdraw physical paper money from
their excess reserves, the Fed would have to give them paper money.
If the Fed did not have enough already, it would have to print more.
The fact that they first credited an account on a computer,
instead of first printing, does not change the impact of what is going on.

MMT people often count government bonds as money. But they are
not the same. A 30 year bond can go up and down in value as interest
rates change. In the real world things are priced in money, not
30 year bonds. They point out that a 1 day bond is not much different
than money, and even a 3 month bond is not all that different.
In MMT terms, a bond is delaying demand, so the shorter the term the
less it really does. But if you watch the value of a 30 year bond
go up and down relative to dollars, you can't say they are the same.
MMT people will say gold is not money because you can't use it
at the supermarket. Well, you can't use 30 year bonds at the
supermarket either.

Another basic error is that MMT people think the government can get
something for nothing by printing money. They believe that the
economy can be improved just by printing more money.
If you accuse them of believing that you can "print prosperity"
they will deny it, but printing to a better economy and
printing to prosperity are about the same thing.
Their view is that as long as there is unemployment the
government can make more money without anything bad happening, like
prices going up. Many times in history people have
thought this, for example,
the Greenbackers
could only see good in printing money.

MMT people want lots of new fiat money, but insist that they are
not advocating "printing money". They have to do this because most everyone
understands that just printing more money can not really create more
real wealth and leads to inflation. This is similar to the Fed
saying "Quantitative Easing" instead of printing money.
The MMT guys argue that much of the
money is just accounts in computers and not actually printed. That the
Fed is using computers to keep track of accounts without always really
printing money does not change the problem.
When governments spend more than they get in taxes and from net
bond sales they make up the different by creating money.
It does not matter if
you call it, "money out of thin air", "seigniorage", "making money", "printing money", "quantitative easing",
"QE", "issuing fiat currency", "adding to bank reserves",
"spending without borrowing", "debasement", "expanding the Fed's balance sheet",
"just monetary policy",
"monetization",
"liquidity operations", "deficit accommodating", or "that thing
which will not be named", it lowers the value of the currency.

There are basically just 3 guys pushing MMT. These are
Bill Mitchell,
Rodger Mitchell,
and
Warren Mosler.
They claim that everyone else gets
the wrong answers because they don't really understand how the modern
monetary system works. While these 3 don't even agree on what MMT
theory is, they seem to think they understand it and nobody else does.
It is not that it is just a different language to them,
they think others are wrong.

MMT focuses on which account names are debited and credited
and misses out on understanding the big picture
of what is going on. While talking about accounts being debited and
credited they won't mention the obvious fact that new fiat money is being
created. They also don't look at the history of previous
experiments in fiat money creation, which is a sad history really.

Austrians vs Keynesians

Austrians believe that the free market grows better without government
meddling. Keynesians think government can make the market work better
by manipulating the money supply. I think that to the extent that
governments can make things better in the present they do so by
making them much worse in the future. As Keynes himself said, "in the long
run we will all be dead". As Peter Schiff says, printing money is to
the economy what taking drugs is to a drug addict. In the short term
it makes the economy feel good, but in the long run it is much worse off.
Now I think what was once the "long run" or "distant future"
has gotten very near. Soon the dollar and the American economy
will be nearly dead.

Printing new money in the reserve currency country is different
from your typical Keynesian situation.
The US actually transfers wealth to the US when they print new money.
Imagine that half the existing dollars are inside the US and half are
outside the US and the US prints another trillion dollars.
With time the existing dollars will be worth less, so half the
loss will be outside the US and half inside, but all of the gain
will be inside.
So there really is a net gain to the US by printing money,
but this is not what Keynes was talking about.
It is doubtful that the rest of the world will put up with high levels
of this forever.

Inflation and Dollar Devaluation

How Much Devaluation

We would like to have an estimate for how much the dollar will be devalued.
The 1933 trouble
resulted in about a factor of 2 devaluation. The 1971 trouble caused
about a factor of 4 devaluation.
In
the 1985 Plaza Accord
about $10 billion was enough to get the dollar to drop by a factor of 2 or 3.
Now the US is printing over $1 trillion per year
and other countries have several trillion they probably want to get rid of.
My rough guess is that international commodity prices, like
oil and gold, could go up by a factor of 8+ over the next few years.

In Jan 1933 the US had
$4,279 million worth of gold.
With the Fed's "money multiplier" of 2.5 they could have had
around $10.7 billion in paper money back then.
The Fed no longer reports M3; however, at
shadowstats.com they estimate about $15 trillion today.
So today we have more than 1,000 times more paper money.
Gold is around 50 times more expensive and silver
around 20 times more. To get to 1,000 times gold
would have to go up by a factor of 20 and silver
by a factor of 50.
If the dollar became much less of a reserve currency,
and gold and silver became important reserve currencies again,
these kinds of factors could happen.

The US monetary base is about $2 trillion. There is about $14 trillion
in government bonds. If people did not buy new bonds but wanted cash,
then the government would have to print another $14 trillion, raising the
monetary base to $16 trillion, or a factor of 8 higher. If there
was no fear of future printing, this might just devalue the dollar
by a factor of 8.

American workers are paid much higher than many countries.
The
US GDP per capita is $46,400
while the world average is only
$10,400.
The world average is brought up by the US, so statistics for
the rest of the world alone would be lower still.
If the
dollar were to keep dropping till US workers were competitive with
the average country it might need to drop by a factor of 5
or more.

Using the
MZM measure of money supply
we have gone from around $1 trillion in 1980 to about $10 trillion now.
So gold and silver going up by a factor of 10 from their prices in
the 70s seems reasonable. Also about a factor of 40 from when they
stopped making silver dollars.

The real problem is that if the dollar devalues by a factor of 5 or 8 it may never be
able to stop devaluing. It could enter the hyperinflation currency death spiral.
Saving a currency once it enters hyperinflation is nearly impossible.

Devaluation and Trade Balance

A common claim is that if the dollar goes down that helps US exports so it is a
good thing. It is even claimed that the reason the US can not export as much
as it imports is that the dollar is too high. Similar claims where made about
the US and Japanese trade imbalance years ago, but even though the dollar was
devalued relative to the Yen it did not help the US export to Japan. The fundamental
problem is that, as long as the US dollar is the international reserve currency,
the US can just export dollars to import things. While this remains true
there is no pressure for the US physical exports to equal their imports.
After the dollar is not taken everywhere, then the US will not just be
able to export dollars, and real exports and imports will have to come into balance.

Imagine a government prints some money, loans it to someone, then gets paid
back, and then burns the money. After this sequence there would be the same
amount of money in existence that there was at the start.
Understanding this the
Real Bills Doctrine
that printing money was ok as long as it was loaned out as good debts
that would get paid back in a short time period makes sense.
The inflation comes
only if the bank is printing money and not getting sufficient collateral.

If the person who got the loan never pays it back,
then there will be permanent inflation. People understand that
the US government will not really pay back the Fed.
When the Fed gives money to the Treasury it is viewed as permanently
inflating the money supply and called
monetizing the debt,
which is a type of
quantitative easing.

In the 1920s most of the new money went to margin loans to buy stock.
As the stock prices went down the amount people could borrow was reduced
and they had to pay back part of their loans.

Back in the 1914 to 1933 time-frame for every $1
the Fed had in circulation they had to have $0.40 in gold. If everyone
took out their gold there would only be 40% as much money, which is
deflation.
So stock prices going down
and people turning in paper for gold were deflationary.

This time much of the money was loaned out for houses and highly
leveraged derivatives that turned out to be bad debt. So the money
is not getting paid back to banks. The banks in turn are going
bankrupt and not paying back the Fed. So there is not nearly the
deflationary pressure this time as during the 30s.

In
Bernanke's Helicopter Drop Paper
he points out that if a government in a gold money system had
a magic machine that could make infinite amounts of gold coins from nothing,
and used it a lot,
that the value of gold would go down. Almost everyone understands that
if gold were not so rare it would not be so valuable and if it was as
plentiful as sand it would be cheap like sand. Having a printing press
that makes dollars in a fiat money system is just like a magic machine
that makes gold in a gold money system. If you make lots the value
of each unit will go down.

Imagine lots of criminal organizations with printing
presses that can make perfect counterfeit dollars,
indistinguishable from government made US paper money.
Further imagine that these organizations
print/spend trillions of new dollars into existence.
What would happen?
Clearly the value of the US paper money would drop fast.
It is the increase in amount of money that makes it worth less,
no matter if the government or counterfeiters print it.

There are those that think that if the total value of all US assets
drops by some trillions of dollars that it is the same as if the
money supply has dropped by that amount and so deflationary.
This is not exactly correct. If a house goes up in value it
does not cause inflation and if it goes down in value it does
not cause deflation. However, the amount of money that the
banks can borrow from the Fed does go up and down with asset values
of the collateral they have for the loans on their own balance sheets.
So if home owners treat their house like an ATM, then with help from a
bank and the Fed,
asset values can impact the money supply,
but it is not a direct link. But when the economy is bad and
people are losing jobs they can not borrow as much money,
which can cause deflation.

Before 1971 the money of the world had some tie to gold but after then
it has not. Under a real gold standard (prior to 1914) people
went 100 years without
inflation and had times where prices went down some. Given advances in
productivity it is reasonable to expect prices to go down.
Since leaving gold in the 70s we have had high inflation unlike anything
ever seen under a real gold standard.
Given that inflation does not extend back into the gold period it
seems wrong to expect deflation from the gold period to extend into
the fiat period.

People who argue we are in for deflation,
like
Mish,
count defaults as deflationary since they reduce the total credit.
But if the central bank is not getting paid back then default is not deflationary.

Some people argue that since the Fed and banks loan money into existence
they can not really increase the money supply if people are not willing
to borrow more or the banks are not willing to lend more. People say
the banks are just sitting on the cash.
Those that argue this way forget that the government
has an insatiable appetite for borrowing and spending.
In
2008 the Fed started paying banks interest on reserves at the Fed.
So the banks can earn interest either from the Fed
or from the Treasury.
This new Fed paying interest bit has helped confuse most people.
One should really view the Fed as part of the government and the
banks as lending their cash to the government (either Fed or Treasury).
So the truth is the banks loaned their cash to the government instead
of private entities, not that they are sitting on it.
This is called
crowding out. It is not good for business or the economy.

Another argument is that although the banks have lots of "excess reserves"
they can not really loan out this money as they are capital constrained and not reserve constrained.
Since banks are not
solvent
even if they have extra reserves they are in no position to
make new loans.
So banks are not able to
use fractional reserve lending to increase the money supply.
Since banks may make 10 times or more the credit that they have
in reserves, it would be inflationary if they made loans, but
they are not.
Mish presents this argument and it is a strong case for deflation
for some period of time.
However, the Fed is doing everything
possible to get at least some banks to be very profitable.
Even letting them "extend and pretend" and "mark to fantasy".
So deflation from this seems only for a limited time,
ending when the banks start really lending again.

Some people argue that we can not get inflation while there is still
high unemployment. These people will often babble about "cost-push inflation"
or "demand-pull inflation" but inflation is an increase in the money
supply and anyone who says different is confused.
The US had high inflation and high unemployment in the 1970s,
so any claim that you can't get inflation when there is unemployment
is contradicted by history and should be either ignored or laughed at.

Some people argue that with housing prices and stocks down that the value
of the dollar is clearly up. But this is not true either. As interest
rates go up the yield on bonds goes up and the price of existing bonds goes down.
To have competitive earnings or
dividends at the new higher interest rates the price of stocks has to go down,
and the P/E down. At first stock prices go down due to increasing inflation.
After this initial adjustment period, a long enough time at
stable inflation rates will tend to drive stock prices up.

Some note that a slowing of the
velocity of money
can also contribute to
deflation.
This does not seem to feed on itself in any way or explode into a big problem.
So the slowing seems to be a limited impact change that
continuous printing of money always eventually overpowers.

As
Peter Schiff points out
if defaulting on a loan destroyed the money then the Fed could
let everyone default and pay off all the loans and there would be
no problem or change in the money supply. If that really worked
you can bet they would be doing it.

Peter also points out that if you view gold as the only real money
then there is deflation. It takes fewer and fewer grams of gold
to buy things as gold gets more expensive in terms of dollars.

The
Ka-Poom Theory
predicts that after an asset bubble pops there is a short
period of deflation and then high inflation.
There is a limited amount of deflationary pressure and no
limit to the amount of money the government can print, so
deflation is at most a temporary issue. The longer term
danger is high inflation. In fighting the deflation by
printing money the government sets things up for high inflation.
It is
often the case that deflation precedes hyperinflation, for example Germany
had 50% deflation right before the start of hyperinflation in the 1920s.

Another point is that the prices of different groups of things act
differently in hard times or as you head into hyperinflation.
People always need to buy food, even if prices have gone up.
But some things are optional and people will buy less in hard times.
So the prices on the luxuries can drop in hard times.
Housing and rents tends to drop in price because people can get by
on a smaller house or apartment, or moving in with friends or parents.
So housing is a place where people will cut expenses if they have to.
So there is a good chance we see inflation in the things we really
need and deflation in the optional things. Government statistics
lump everything together which will average out the deflationary
and inflationary items. So government statistics can easily report
less inflation than the average person is feeling on the stuff they
really buy.

My view is that there is a delay
from when they print money till the
effects of the monetary inflation result in price inflation.
Also, I think that the total pay-down on debt (not counting
defaults) is less than the $1.5 trillion increase by the
Federal government each year. So I don't think the money
supply is really contracting any more.
So in the short term there could be some price deflation, in particular
for optional things and housing. But that after this period, which
I think is less than 4 years, there will be serious inflation,
in particular for the necessities like food and energy. But
no matter what, I expect gold and silver to become more valuable
compared to the US dollars. This is both because of the eventual
inflation and because I expect the dollar to have a smaller role
as a reserve currency.

Inflation and US taxes

If you buy some stock or land for $100,000 and then 10 years later sell it for $200,000
the government says you made a $100,000 profit and have to pay taxes on that. It is
very possible that really the dollar is just worth half as much and really there is
no profit at all. But you pay taxes as if there was a real gain.

Richer people pay a higher percentage in taxes. Inflation makes it look like people
are richer, so puts them into a higher tax bracket.
So Obama said he would not increase taxes on people making less than $250,000 but
he could never get enough money out of the few making more than that. So if he
prints enough money then after inflation lots of people will be making more
than $250,000.

During the "boom times" when asset values are going up and lots of people
think they are getting rich, or inflationary times,
government tax revenues do well.
Not only does government get to spend the money they print,
the side effects of inflation on taxes are good for government,
though bad for their subjects.
By a continuing process of inflation, government can confiscate,
secretly and unobserved, an important part of the wealth of their citizens.
- John Maynard Keynes

Suppressed Inflation

The idea of
suppressed inflation is that government can sometimes temporarily
hide the effects of increasing the money supply.

When the US sells bonds to the Central Bank of China it takes some dollars
out of circulation. This can hide away some dollars so they can print more
without causing trouble. But it is only temporary, as the Chinese will
some day turn in the bonds for cash.

Contrarian Dollar Investing

Some people say that there are so many people negative on the
dollar that they are going to use contrarian investing and bet
that the dollar goes up. Contrarian investing notes that if
everyone thinks something with a finite supply, say the stock in
some company, is going to go up (or down)
that everyone will already have placed their bets and there are no new
investors to drive the price further, so it can only go the other way.
There is some truth to this. But it does not apply to
a currency that is being continually printed in large amounts. In this
case there is always new supply.
For example, in Zimbabwe everyone thought the currency was going to go
down and it did.

Also, there is still many trillions of US dollars out there,
so in no way can you say "everyone has already sold their dollars".
And the 30 year bond is around 4%, which it won't be when
everyone is really negative on the dollar.

On TV most people are saying gold is a bubble or that it is
dangerous to buy gold after it has gone up so much. The truth is
most people these days have never even seen a gold coin, let
alone invested in gold. So contrarian investing would still be
to buy gold.

One evidence people have used to claim there is a gold bubble is
all the "cash for gold" parties going on. But at these the public
is selling gold to a buyer. In a bubble the public would all be
buying something, not selling.

The real bubble is in US government debt. As interest rates go
up (where else can they go from zero on the short term to
4% on the 30 year) the bond values will go down.

Devaluation even if people don't like it

One claim is that it is not in the interest of dollar holders
to devalue the dollar, since they are holding them. The idea is that
if a country sells dollars the value will go down and then the
dollars it has left are worth less, so it should not sell any.
So if China has $800 billion and they start selling the price
will go down, so they should not sell any.

First off, there is a problem with any asset that only seems
valuable if nobody sells it. The value is not real.
It is probably a bubble that is about to pop.
You really don't want to hold something that you can not sell.

The problem with this
logic is that even if one country does not sell, other countries can.
In particular, even if one does not sell, the US will still be printing
and spending another trillion every year. So the longer they wait the less
value they will get when they sell. For Russia, or Brazil, or
Saudi Arabia, or any country, retirement fund, etc. the
sooner they sell the better. Each is much better off to be the
first to sell than the last to sell. In this situation it is
more rational to sell than to wait.

This is a bit like the
Prisoner's dilemma. In this prisoners would be better
off if they all kept quiet, but that is not what happens.

Can the Fed quit printing any time?

The Fed tries to make it seem there is a fixed amount they will be
printing, or
quantitative easing,
and then they will stop.
They also say that when the recovery starts they will have an "exit strategy"
where they "mop up excess liquidity", so inflation won't be a problem.
Bernanke's idea seems to be to stop printing money and just collect interest
payments to remove money from circulation. But with near 0% interest rates,
even if he could stop printing, this exit strategy would not do much
mopping.

The Fed saying they can stop printing any time is just like an
alcoholic saying they can quit any time.

The truth is that the Federal budget is out of control.
In October of 2009 the federal government
spent $2.30 for every $1.00 they took in.
There
will be more than a trillion dollar deficit every year going forward.
The Federal government will sell bonds for the amount of the deficit plus
any bonds coming due.
Investors have gotten out of long term bonds, mostly buying
short term, so many come due all the time. The
Fed will buy any bonds not bought by anybody else. If they did not,
the Federal government would change the laws governing the Fed
or the people running it till they did.

The government spending is out of control and
the Fed will keep printing as fast as the government needs.

Delay between printing money and rising prices

We get Keynesian economists who say
there are no signs of inflation.
What they mean is we should not be reacting to the monetary
inflation because it has not yet shown up as price inflation.
Any junior economist student would know that
there is a delay between when the money is printed and when
the prices go up. A few minutes browsing a
Google search for inflation money price delay
and anyone can learn about it. Usually the delay is 2 to 4 years.
It gets faster for countries that are used to inflation.
This has been well understood at least since Milton Friedman
wrote about it in 1961, saying there were "long and variable delays" from when
the money supply was increased to when prices went up.
For sure a Nobel Prize wining economist
like Krugman knows about this delay.
He knows that when you print around a trillion new dollars
near the end of 2008 that inflation might not show up till
near the end of 2012.
It seems dishonest for such a man to say there is no reason to
worry about inflation because prices are stable so far.

The delay even makes sense.
Initially as the central bank prints money and buys bonds
they are forcing the interest rate down. As
Hussman shows, lower interest rates result in a lower velocity of money.
Using the
equation of exchange
we can see how initially the lower velocity of money can sort of compensate for the
higher quantity of money, so prices may not go up much.
However, a substantial increase in the money supply that is not followed by an
exit strategy
will eventually result in price inflation.
Then the central bank will try to fight inflation by not printing so much money.
But if they are not printing money and buying bonds the interest rates will go up.
And as the interest rates go up the velocity of money goes up (again Hussman).
This time the
equation of exchange shows, an increasing velocity of money will tend to push up prices.
So it can be hard to "put the inflation genie back in the bottle".

Milton Friedman explained that
a central banker that did not understand the delay between printing money
and inflation could act like
a fool in the shower.
If you just look at the current inflation rate you may think it is ok
to print more money even though so much has already been printed that
high inflation is coming.

Keynesians reason about what happens when they print more money with
the assumption that most people don't understand what is going on.
In the 1920s and 1930s, when people's parents and grandparents had
been using gold money, this was clearly true. You had people
in German with piles of money who could not understand why it
was worthless. But today, when people's parents and grandparents
lived through the 1970s, people know that if you print too much money
it will not be worth as much. If people have piles of US dollars
they will understand that the Fed printed too much money.
So Keynesian reasoning seems fundamentally flawed.

Debt Money vs. Simple Fiat Money

If a government just created paper money and spent it they would not need
to borrow it from a central bank. This is simple fiat money.
But this is clearly inflationary and so not very popular.

A central bank is supposed to only loan out money, so it can theoretically
get all the money back and not cause any permanent inflation. In fact, since it
is charging interest it can pull in lots of dollars as interest payments.
Clearly a bank that can charge interest and print money out of thin air
will be very profitable, and so able to pull in lots of dollars.
So it is much easier
to maintain the value of paper money when all money is only loaned out.
In fact, theoretically there are not enough dollars out to pay back both the
loan and the interest, since the dollars printed is only equal to the loans created.
So as the central bank makes more and more on interest the dollars should become
scarcer and scarcer and so more valuable. So deflation is at least theoretically
an easy thing to get with a central bank system.

Where this central bank system breaks down is when the central bank loans new paper money
out to banks, companies, governments that go bankrupt and don't pay back.
These dollars are then out in the wild and inflationary. Buying toxic
assets that can not be sold for the price paid is a similar thing.
The biggest breakdown is that the government is not really going to ever pay the
loans back.

Hyperinflation

Hyperinflation is how a government that can print all the
money they want goes bankrupt. Some people think that
the ability to print money means governments can spend all
they want and never have a problem. Hyperinflation is why
that is not true.

When a government's debt level is over 80% of GNP and the
deficit is over 40% of government spending it is probably
headed for hyperinflation. What happens is that people are
not confident of the long term prospects, so move into short term debt.
Then some people stop rolling over their bonds and get cash as the
bonds come due. This causes the government to need to print more
money. But the more money it prints the less people want to hold its
bonds. But the less people want to holds its bonds the more money it
has to print. So you get into a
positive feedback loop called
hyperinflation where things get out of control.
As things progress it not only has to print money for the full deficit, but also
for any bonds that come due. This can be a huge amount of printing.
With a large deficit and lots of bonds coming due it is not possible
to increase taxes enough or reduce spending enough and so the
government is forced to print.
Once a government is in a situation where it is forced to print
significant quantities of money it can get
hyperinflation.
This is a
common occurrence even in modern times.
The math for hyperinflation
is not very complex.
There are
typical stages hyperinflation goes through.

In most countries the central bank has some kind of reserves to
support the currency. So if the currency is too low, they buy
up some of their own currency, using their reserves, to support
the value. The US reserves are mostly in bonds. The problem is the Fed
has moved into long term bonds which can drop in value as interest
rates go up. So the value of the bonds can drop so that they do not
have the ability to buy back as many dollars as there are out there.
If other countries stared to
unload their dollars there is nothing the US could do to
that would support the value of the dollar. At that point
it will be like
rats leaving a sinking ship.

With unusually low interest rates the
interest on the US national debt
was $454 billion in 2008
while
total taxes are about 4 times that.
So around 25% of the taxes are needed just for the interest,
even at these amazingly low interest rates.
If interest rates double or triple it would be clear to everyone that
the US has no chance of using taxes to pay down the debt.

There are many routes to get into the hyperinflation positive feedback loop (war, dictatorship, democracy, revolution).
But once in it what do you have to do to stop it? Bernholz page 193 says, “A necessary condition
to stop hyperinflation is to end money creation for the purpose of financing budget deficits
of the government, its agencies and the losses of firms owned or controlled by it.
For this purpose a strict limitation of these deficits is necessary.”
If the only way to stop hyperinflation is to stop printing for the deficit, it seems very clear
what the core problem is in hyperinflation, printing for the deficit.

One of the most common claims is "the powers that be would not make
hyperinflation because it would be bad for them". There are two
problems with this. First, hyperinflation is when events cause
government money printing to get out of control. I don't think any
of the 100+ cases have been planned ahead of time.
Second, actually, if someone knew for sure there was going
to be hyperinflation, they could make very good money.
Never attribute to malice that which can be adequately explained by stupidity.

Another claim is that people were predicting hyperinflation
last year and it did not happen so they are wrong and should be
ignored. However, with bonds paying about 0% per year and
having the prospects of losing 90% of their
value very quickly in hyperinflation, getting out years early
is better than being at all late.

US Hyperinflation destroys much of world reserves

Normal countries have central bank reserves that can be used to
support their currency by buying up some of their currency if it
gets too low. However, nearly 2/3rds of the world reserves are
in US dollars. If the dollar crashes, then the reserves backing
other currencies crashes. This
could cause many other paper currencies to crash as well.
Also, with many paper currencies crashing, people
could lose faith in even better run paper currencies. So if the
dollar fails, paper money all around the world could fail.

The currencies can catch themselves after they devalue compared to gold
to where the central banks gold reserves can match the currency issued.
In many banks the gold reserves are only like 5% of their reserves,
so the currency would have to devalue by a factor of 20 before the gold
could support the currency. The US claims it has around $300 billion in gold.
They have fought any audit of this so there is some doubt that they really
have it. The US has been known to loan gold to companies that go bankrupt.
However, if they had it and held onto it till the price of gold went up by 20 times
or more then they could use that gold to support the US dollar.
If they use the gold earlier they would just lose all the gold.

Hyperinflation Workarounds

Citizens of a country with hyperinflation do not want to use the
local currency as a store of value, even if they get paid in the
local currency and use it for shopping.
Typically during hyperinflation people get paid daily and
quickly shop and then convert any extra local currency into something that
can retain value better. This might be goods they can use later
like canned or dry food,
a more stable foreign currency, or gold or silver.
But soon after getting paid all of their local currency is used up.
People in Argentina often used US dollars to store value
during their hyperinflation periods.
But if paper money around the world is going
down fast, using a foreign currency will not work well this time, leaving only
real goods and gold or silver.
So this time gold and silver will be in great demand.

In India, where so many people buy gold, the average person will
seem much richer compared to the world average,
after worldwide hyperinflation.
It will be much easier for them to start using gold as money,
since it is so widely held.

Hyperinflation Stages

There is a general pattern for the stages of hyperinflation.
This can also be viewed as the stages of the "death of a fiat currency".
Money can be seen as serving 3 roles. It is a medium of exchange,
it is a store of value, and it is a unit of accounting. As we move through
the stages of hyperinflation the money gradually gives up these 3 roles.

Government spending gets out of control to where deficit is 40% or more
of spending and debt is over 80% of GNP. If this is for a war that the markets
believe will be won and ended so that the government can make drastic cuts in
spending then there is some wiggle room in these numbers.

This goes on for a couple years and investors move towards shorter term bonds.

It becomes clear the deficit is not going back down.

The central bank starts buying up government debt with newly made
money. If they are not naturally inclined to do this the government
changes the laws or people running the central bank. For the rest
of this section I will write as if the central bank were just part
of the government and ignore bond certificates printed by the
government and handed to the central bank as these will become
worthless anyway. With this simplification I will just say,
"the government prints money".

There is capital flight out of that currency and bond sales fail.
If the government let bond interest rates rise to attract bond buyers
the interest payments on the debt would be huge compared to
taxes collected, so they
keep interest rates down by printing more money.
However, the private investors become less and less inclined to "roll over" their
government bonds.

Government is forced to print money to cover their budget and inflation picks up.
The more bonds coming due the worse the printing is. Many short term
bonds can make for huge amounts of printing, even more than the regular budget.

Some people notice prices going up and spend their money
before prices go up more, even for things they don't need yet.
The velocity of money picks up.
People start to realize that the local currency is not a good store
of value, though still used for transactions.
Some people start to use foreign currencies or gold as a store of value.

So many people take money out of their bank accounts and exchange
it for a foreign currency, or gold, or just buy something that banks
are in danger of going under. So the government often freezes bank
accounts. This is very bad for the account holders,
both because times are hard and they can't get their money and also
because by the time they are able to get it their money it is worth
much less.

Wages and prices become indexed to something more stable, like a foreign
currency or gold. Wages become paid more often, like weekly or daily
instead of monthly. The velocity of money picks up more.

People start to use a foreign currency or gold as store of value,
even though government may forbid it. The black market starts
in currency exchange.

Interest rates are very high and loans are for much shorter periods.
Hyperinflation makes for hard times and many people are forced to
sell their their land or house.
Because of these things the real prices drop in terms of
something like gold.
for real estate financing real estate is much different during
hyperinflation and normal times.

People start to use barter or a foreign currency or gold for trade,
even though government forbids it. This is a growing black market
for commerce.
If you trade a fish you caught
for some potatoes your friend grew, neither of you is paying any
taxes on the deal. In general once people are breaking the
law by using a foreign currency for trade they don't pay any taxes
on trade either. The black market is tax free.

Being tax free and with better store of value the black market
eventually grows larger than the legal market.
People no longer worry about the government requirement to use local
paper currency, enforcement is impossible.

People start to not want to accept the local paper money.
Regular taxes are down because
hyperinflation has devastated the economy and much of the economy
is now in the "black market".
The government is finding it hard to buy things by printing money,
as so much of the economy has moved to the black market.
It is finding it hard to pay employees enough for them to live
comfortably even though it keeps printing more all the time.
The government is losing economic power.
Tax collectors may be skipping work to tend to their own vegetable garden.
There is a very real risk of the government failing at this step.

At this point the government has some hard choices if it is not going to fail.
It needs to do something so that the "black market" is legalized
and taxable and deficits are nearly eliminated.
It could just legalize a foreign currency or gold.
But then it would forever give up on collecting any "inflation tax".
It could get rid of budget deficits and stop printing money. However, people will still
fear that it could start again at any time and so be hesitant to use that money.
I think the most frequent end to hyperinflation is by
making a new fiat money but with enough governmental changes that
deficits and inflation are under control and people will use the new money.
If they switch to a new currency then old money is no longer used as a store of value,
or unit of account, or even for transactions. It has died.

Math for Hyperinflation

Before looking at the link explaining the math of hyperinflation you should
understand a little bit of background.

Printing lots of money causes high inflation.

With high inflation people
don't want to hold money as long, since they lose more
the longer they hold it, so the velocity of money goes up.
The higher the inflation the faster people will spend their money,
because they are losing faster.

High inflation is bad for GNP. This is because
planning for the future, or borrowing money for a company, becomes really hard.
Prices for some things, like gas, could go up fast and slow production of other things.
If people are having a hard time paying for necessities they cut back on
the optional things, so companies in those areas can fail and lower GNP.
Also,
governments usually try price controls which cause shortages
and reduce production. Price controls can make it impossible
for an entrepreneur to make a profit, so he is better off to just shut down
his business and invest his money in gold till the hyperinflation is over.

Another non-linear change is when governments go from "rolling over" existing bonds
and funding a large part of their budget deficit with new bonds to having to pay off bonds
that come due and not being able to sell new bonds or "roll over" bonds.
This is particularly painful if most of the bonds are short term so they
come due quickly.
This makes a sudden and drastic increase in the amount of money the
government must print.

The truth is that all of these and many more are factors in hyperinflation. There is a
positive feedback loop
with a number of things that reinforce each other. As with many other positive feedback loops,
this gets out of control and leads to destruction.
In this case destruction of the currency.
Arguing about which of these things came
first is like arguing about which comes first, the chicken or the egg.
Or some kids following each other in a circle arguing about who is in front.
Different people may tell the story starting with different parts of the loop,
but really it is a loop. And the feedback loop is what makes it so dangerous.

People

Ben Bernanke

"It ain't what you don't know that gets you into trouble.
It's what you know for sure that just ain't so." - Mark Twain

The reserve currency of most of the world is really controlled
by a single human being, Ben Bernanke. It is pure lunacy to have
a system that puts so much power in a single human. After enough
different humans are tried over the years we are bound to find
one who ruins the currency.
So given the situation, it is worth looking at who that human is.

A common flaw that generals make is "fighting the last war". Since
the generals studied what happened in the last war, they tend to use
the strategies and tactics that worked well back then. The problem is
that when the situation has changed the methods of dealing with it
must change as well.

The root problem of the Roaring 20s and Great Depression was a
Ponzi scheme by the Federal Reserve where they only had
$0.40 worth of gold for each $1 in paper and said
each $1 in paper was redeemable for $1 in gold.
The increase in money led to a stock bubble.
When people tried to exchange
their paper in the Ponzi-gold-standard for gold the
government had bank holidays and
then made it illegal for people to own gold.
So it was the Fed pushing bad money on the USA and then
the government stealing the people's gold that caused the
trouble, not a real gold standard or printing money too slowly.

For many years now the Fed has been printing money and the
government has been borrowing huge amounts. Now with Obama
it has exploded.
The Fed is buying up
toxic assets
for more than they are worth.
When the Fed increases the money supply this way they do not get an
asset that could be later sold to reduce the money supply. So
they are devaluing the money.
When the Fed is devaluing the money it makes sense to borrow money
from the Fed and convert it to other currencies and invest outside the US.
Loaning dollars out that will be repaid later with cheaper US dollars is not
as sensible. Once again the Fed has mucked up our money, but this time
not by a small factor.

Bad money causes huge problems for the economy. The Fed is again
printing money fast and making bad money. A problem caused by too
much bad money will not be fixed by making more bad money.
Bernanke seems to always want to print more money,
so he does not seem like the ideal person to be
controlling the worlds reserve currency.

Barack Obama

Obama and the Democrats blame problems created by government
on free enterprise and business.
Government printing money and lending at artificially low rates,
guaranteeing financial institutions, pressuring banks to lend to
those not qualified, etc caused the financial trouble.
The likes of Fannie Mae, Freddie Mac, the Federal Reserve, etc
are government creations, not free enterprise.

Obama ran as the candidate for the common man. But once in
he has given
hundreds of billions of dollars to rich bankers
in poorly run or crooked companies while taxing honest and decent folks more.
Rich people can invest so that inflation does not hurt them, but
poor people will see their wages not able to buy as much.
Middle class will see their variable rate mortgages go up so that
their monthly payments go up.
The coming inflation is really the most regressive tax possible.
As Daniel Webster said, "Of all the contrivances devised for
cheating the laboring classes of mankind, none has been more
effective than that which deludes him with paper money."
The anti-business rhetoric and actions drives investment away, dropping
the value of American companies and real estate.
This hurts retirement funds and job opportunities for all Americans.
It is
not because of Bush that the market crashed when it
looked like Obama was going to win.

Obama is taking America down the
The Road To Serfdom
that
Friederich Hayak
wrote about in 1944.
More and more government control leads to less and less freedom
till eventually you have tyranny.
The
statist ideas
of government controlling the economy
have been tried many times under names such as
Fascism,
Communism,
or
Socialism.
America should learn from the sad results of these other experiments
and not repeat them.

The private sector has to pay for the government in one way or another
(taxes, bonds, inflation). The bigger the government gets as a
percentage of the total economy the harder it is on the private sector
to support the government. As a country's government gets bigger,
the overburdened private sector becomes
less attractive as an investment, so capital flows away to better countries.
An overburdened private sector also means the future ability of
the government to pay its bills without printing money becomes more doubtful.
Both of these hurt the value of the currency for that country.
An important study shows that
cutting government spending and cutting taxes help an economy grow.

A big reason the Great Depression lasted so long and that the
current mess is looking so bad is
regime uncertainty. In a capitalist system investors know
the rules and can invest based on reasonable predictions of the future.
Today many
CEOs can's stand Obama.
When a government is frequently changing the rules it is better to
invest someplace else. Like Hoover and FDR, Obama is
"working hard to fix the economy", and in doing so he is messing it up.
It was only after the government focused on WW2, and stopped
troubling the economy so much, that the US recovered from the Great Depression.

Many people have criticized Obama for being against capitalism.
He has
claimed he supports capitalism while 77% of investors surveyed
think he is anti-business.
Obama's defense is
claims like, "The auto bailout is a very politically unpopular decision
that was made that, from my vantage point, is pro-business".
This shows a fundamental misunderstanding.
This type of thing is not "pro-business", it is "pro-AIG" and "pro-GM" but
is not good for business in general as taxes/inflation/debt will go up.
After this taxes on banks and anyone making over $250,000 per year
went up (small business owners).
When the government takes money from productive parts of the economy
and gives it to poorly run or crooked companies it hurts the overall
economy.
Giving taxpayer money to AIG or GM is certainly not capitalism,
it is
corporatism as in the New Deal.
I think
Obama is a corporatist.
The government needs to put those using fraud to take
billions of dollars from people in jail, not give them more billions.

Obama's cabinet has the least private experience by far.
They don't understand that small business owners are troubled
by high taxes, regulations, red tape, etc. produced by government
since
they were never in that position. They don't seem to
even listen to business people, just try to vilify them
and add health care and carbon tax to their already heavy load.
Most new jobs are created by successful small business owners, but
these guys typically make over $250,000 per year,
so they are right in Obama's cross-hairs.
Not understanding what they are doing, the Obama team will be
surprised when no private jobs are created.

Milton Friedman

Milton Friedman seems like one of the best supporters of capitalism the world has
seen. His
15 episode TV show Free To Choose
does an excellent job of explaining why capitalism both works best
and it best morally.

It is a sad legacy for Friedman that
hyperinflation
is probably coming because
Bernanke
is such a fan of Friedman.
It is ironic that the US government is destroying the currency, the economy,
and capitalism in America using advice from someone who
is thought of as a great supporter of capitalism.

Gold Money

Remonetization of Gold for International Trade

There are a couple problems with fiat money. The first is that
government can steal value out of your pocket full of money without
you even seeing anything happen. The second is that inflation rates
and interest rates depend on human decisions so the value of money
can not be predicted far into the future. This makes investment
decision making and economies in general not work as well.

An honest money is one that people can not just randomly make more of.
Gold and silver are the natural candidates for this as they have
worked for around 5,000 years.

Gresham's Law says that
"Bad money drives out good under
legal tender laws".
If creditors have to accept paper money as equal payment to
that of gold money, then the gold will be used somewhere else
where it can command a higher value.

In a free
market Gresham's law works the other way, Good money drives
out bad. People would rather hold a stable currency than
one that is dropping in value. Sometimes they do so even when
it is illegal.

Between countries there is no legal tender law forcing
people to use bad money. They
can choose whatever they want to use as money.
In this situation it makes sense for them to switch
from US dollars to gold. No country wants to have their wealth
stolen from them when they can prevent it.

Sound Money

The problem with fiat currency is that at any time the government could
print any amount of new currency and
steal value from existing currency holders.
The next problem is the uncertainty of how much they will be
printing each year makes correct planning for the future impossible.
All kinds of bad investments are made because interest rates
and the value of fiat currency are controlled by the whims of government
and unpredictable.

Gold and silver are sound money. If one country is holding some gold they
don't have to worry about some other country printing more and stealing
the value of their gold. If gold is used between countries to settle
payments then no single country gets to print currency
and buy as much international goods as they want without exporting
stuff of a similar value. The current
world imbalances
would not happen if gold was used as money between countries.

In the US,
from 1933 to 1974 it was illegal to own gold. These 41 years
broke most Americans from thinking of gold as money. However, the
5,000 year tradition of gold as money was not so badly broken
in the rest of the world.

International Balances

When gold is use as money between countries there is an automatic
balancing that occurs. If one country is importing more than it is
exporting then the amount of gold it has internally will go down and
domestic prices will go down. This causes people to buy more local
stuff instead of importing and for their exports to be more competitive
and so sell better. So things naturally correct in a smooth way.

Under the current system where the US has the
Exorbitant Privilege
of being able to print paper money that is used all around the world,
there is no natural balancing force. The US can keep printing money
to pay for imports and never run short.

But the more money the US prints, then the more people in the US have.
The wages inside the US then seem very high compared to the rest of the
world. So the printing of paper money inside the US drives jobs overseas.
Gold does not do this (except when Spain took lots of gold from the New World).

The
balance of payment
issues don't get so out of balance if gold is used between countries.
If money is gold, then you can't keep buying things if you
are not also selling things.

Banks

Why Banks Go Bust

Not requiring sufficient down payment (at least 20%) puts
the bank at risk even if the house goes down a little.
With government playing with the money supply, asset prices
are not as stable as they would otherwise be.

Government requirements to loan to low income people.

However, there is a fundamental problem with the way Western
fractional reserve banking
works.
The banks loan money out long term, like 20 years, but
have demand deposits that can be taken out at any time.
So if people get nervous about a bank, even if for no good reason,
and take their money out you can get a
bank run and cause a bank to go under.
There is a simple way to remove the danger of a bank run.
Instead of using demand deposits for loans,
banks should sell long term bonds of equal time periods to their loans.
This is called the
Principle of Matching Maturities.
For example, a bank would sell a total of $100,000 in 10 year bonds
to have the money for a 10 year loan of $100,000.

Another way to look at fractional reserves is as "creating money".
Demand deposits count as money. People assume they can spend it
at any time. If a bank sold a 5 year bond for $100,000 and then
made a 5 year loan for $100,000 it is not creating money.
But in fractional reserve banking things are different.
Imagine a bank gets a $100,000 demand deposit and loans out
$90,000 on a 10 year loan and the person that
gets the loan puts it in another bank as a demand deposit.
In this situation both the $100,000 demand deposit and the
$90,000 demand deposit count as part of the money supply.
So the bank has sort of increased the money supply by $90,000.
Note this could be repeated many times.
There is a fraud in this system though. With demand deposits
everyone is theoretically allowed to take out their money at the
same time, but there is not enough money for everyone to take out
their demand deposits at the same time. In that situation
everyone expects the Fed to print lots of money and
"provide liquidity" to the banks (loan them lots of money).
This is part of what happened recently.

The government has a
reserve requirement
that they can change at any time. This requires the bank to keep a
certain amount of money sitting around unused, maybe 10%.
But since it can change,
it really keeps banks from doing the safe thing of 100% matching of
the duration of their deposits and loans.
So once again we see that some government law has
unintended consequences.

Sometimes people say "debt is money". I don't say that because if debts
were funded by deposits of the same duration debt would not be involved
with money creation.
However, if all debts come from fractional reserve banks
making long term loans from demand deposits, then the total amount of
debt can tell you how much money the banks have created.

I think the right way to look at bank crashes is as an FAA agent, or Engineer,
or Programmer would. Figure out why bank crashes happen, locate the
design defect (lending long term on short term deposits) and fix the
core problem so it does not happen again. A new law saying that
all loans much be against deposits of the same duration would fix it.
Of course this is not
how US government changes to financial regulations worked at all.

Solvency vs. Liquidity

As explained in the previous section, any bank using fractional reserve banking
can get in a situation where too many depositors try to take out their money
at the same time. The loans the bank makes are long term, so they can not
be converted to cash, so they are said to not be liquid. So this is a
"liquidity crisis".

A "solvency crisis" on the other hand is when the total value of the loans
is less than the total value of the deposits.

Anna Schwartz says the current problem is a solvency crisis, not a liquidity crisis.
The problem is that so many loans have gone bad that banks can not cover their
deposits, even if all the remaining loans paid off. A liquidity crisis can
be handled by the Fed loaning the bank money which can then be paid back.
However, in a solvency crisis money given to banks can not be paid back.
When the Fed gives money to banks that is not paid back it is inflationary.
But people are treating the current mess like it was a liquidity crisis.

Stock Market

Why Stock E/P ratio tracks bond Earnings

The inverse of the P/E ratio, the E/P ratio tends to track
bond earnings. There are lots of ways to look at this.
One is that
stock E/P ratios track inflation and bond earnings do too.
I present here two arbitrage situations that would tend to
keep these two things in line as a short way to understand
why they should move together.

Imagine that $100 million company had higher earnings than
$100 million in bonds did.
Then you could sell some bonds, buy the company use part
of the company earnings to pay the bonds and pocket the rest.
This is a
Leveraged Buyout.

Imagine that people were paying more for a company that
earned $10 mil than for bonds that earned $10 mil. Then
you could form a company that sold shares and bought
bonds. It would then have better earnings than companies
of its market cap and yet lower risk and so be a better investment.
Many "dot com" companies took the money from their IPOs and put
it into bonds, giving them earnings that looked reasonable.

Rationality of 1987 Stock Market Crash

Some people have claimed that the 1987 crash is evidence that markets
are not rational.
However, a real inspection of the situation shows that the market was
responding rationally to government created circumstances.

In the US a company's earnings are taxed and then when a shareholder
gets paid dividends those same profits are taxed a second time.
In the 1980s some people noticed that companies can deduct from
their earnings any interest expenses they pay to bond holders.
Since taxes are reduced, a company was sort of worth more in the
hands of bond-holders than in the hands of shareholders. This
caused a boom in leveraged buy outs.

Imagine there is a company that has $10 million in pre-tax profits and the
current P/E is 10 and interest rates are 10%. Further imagine that
this company has taxes of 40%. So after taxes of $4 million the profits are $6
million and with a P/E of 10 it is valued at $60 million. Imagine
it pays the whole $6 million out as dividends to shareholders.

Imagine we start a new company and sell $60 million in bonds
and buy that company. Now the interest on the bonds is $6 million,
so our company has $10 million in pre-tax profits from the company
we bought and $6 million in expenses. So net we have $4 million
in profits. After 40% taxes, or $1.6 mil, we still
have $2.4 million per year of new found money.

So if we move $60 million worth of investors from stock holders to bond holders,
they can still get the same $6 million per year (but as bond interest
instead of stock dividends) and we make $2.4 mil per year. The key to this
trick is that taxes were reduced from $4 mil to $1.6 mil because the
bond interest is a pre-tax expense. If we can buy the company for anything
under $100 million we could make a profit. At $100 million the earnings
would just cover the bond interest and the government gets no taxes.
With enough others trying to do this we might bid the price of the
company up from $60 mil to $100 mil, or up 67%.

In this kind of environment there is huge money in doing "leveraged buy outs"
and "mergers and acquisitions". This will tend to drive up the stock
prices too, as this method of reducing taxes increases the real value.
But the government is losing tax revenue from this trick.
So on October 14-16 the House Ways and Means Committee
proposed legislation to ban leveraged buyouts and hostile mergers.
The market crashed October 19-20, 1987.
The
proposed law change and market crash are very much related.

Stock Market Prediction

This is probably the most speculative section in this article, so reader
be warned. This information is education in nature and, therefore,
is not intended to constitute investment advice and should not be
interpreted as a recommendation to purchase, sell or hold a particular
security. Prior to making any investment decision, the services of an
appropriate professional should be sought as investment related
recommendations are dependent upon the personal situation of each
individual investor.

Assuming that you accept the main conclusion of this article, that
paper money is going to go down in value, what should we expect the
stock market to do?

One line of thinking is that companies represent real value, far more
so than paper money, so as paper money goes down the value of the stocks
should go up. In hyperinflation you are much better off owning companies
with real assets than just paper money.

Another possibility though. If inflation starts and interest rates go up,
then by the P/E argument (see 2 sections back) we would expect stocks
to go down, at least at first.

Another issue is that during the housing bubble the whole country
thought they were better off and spent more money. So all kinds of
companies found it easier to make profits. With this gone, all
kinds of companies are going to have a harder time making profits.
So the stock market could go lower.

Another effect is that the whole US will be worse off when the US
can not just print money and get stuff from other countries.
The US will suddenly have a hard time buying oil or things from
China when it has to export as much as it imports. So all kinds
of US companies will be in hard times as US citizens are in hard times.
So this will be bad for the market.

The US government is growing and will be increasing taxes, which
hurts company profits, which hurts stock values. Also, with
the mandated health care and other government regulations the
US is not as good a location to run a business. As a country
moves more toward a government controlled economy it is not
as good for investors to put their money there. So investors
will probably be investing more outside the US and this will
cause stocks to go down too.

A big question is do we expect to first see a gradual rise in inflation,
or will we just suddenly get a devaluation of the dollar? I don't know.

While there are many good reasons for the stock market
to go down, the risk of sudden dollar devaluation and so rising
stock prices in terms of dollars, makes going short on the market
in dollars dangerous. However, shorting the market it terms of
gold could be very reasonable. You might sort of do this by going
long gold and short the market.

US Government

How the US Robs Social Security and Medicare funds

People pay through their working career into Social Security
and Medicare funds. Between employer and employee about 15% of
wages gets paid to Social Security. These funds where supposed to be invested
so they could grow to much larger amounts after many years.
But now Social Security is called an "unfunded liability". How
in the world did it get unfunded?

The US government requires that these funds invest
in government debt. However, the Federal Reserve is usually
holding interest rates artificially low by
printing money and lending it out. So it is often the
case that the real inflation rate (though maybe not
bogus CPI measure)
is higher than the interest rate. So instead of increasing in real
value the forced investment is a loser. It is as if money were robbed
from the Social Security fund and transfered to the government.

The Fed is also
paying interest to banks to get them to hold excess reserves
off the market. This is about the same as if the banks had bought
Treasury bonds and the money was off the market.
It is best to just think of The Fed, The Government, and FM&FM as all inside the same box.
Just think about what is going in or out of that box.

Another point. If you have a small government that is taxing at 10% of
GNP but spending at 20% of GNP we can imagine that it just increases taxes
and balances the budget. However, if a government is taxing at 30% of
GNP and spending at 60% it is really not reasonable to double taxes.
So spending twice what you get in taxes is much more dangerous for a big
fat government.

The US government has made a big increase in their
future mandatory expenses with the health care changes.
So the deficit situation looks to be getting worse, not better.

Krugman also points out that if GDP is growing at higher rate than the
debt interest rate that interest alone is not making debt/GDP ratio worse.
While this statement is true, it ignores a few big problems.
First, the whole Federal deficit is growing the debt, not just the interest.
The whole deficit is around $1.5 trillion.
With around $15 trillion debt this means the debt is
growing by around 10% per year, which is much higher than the GDP growth rate.
The second problem is that the GDP may not even grow for awhile.
The third problem is that interest rates can and will go up. Interest
rates are amazingly low right now but there is no way they will stay so low.
Since most government debt is short term now it is like the government has an adjustable
rate mortgage, as soon as rates go up they have to pay higher interest and the
deficit will grow even larger. They will have to print more money, which
will drive up rates more, which will lead to even larger deficits and even
more printing, etc.

Krugman has a model showing that if the debt gets too high you get hyperinflation.
However, he thinks the US is nowhere near the danger level.
The big flaw with his model is that it ignores the huge deficit
problem and only looks at servicing the debt.
Given that the article is subtitled "When do deficits cause inflation?"
it is amusing that he ignores the deficit problem.
But the deficit is around 10% of GDP.
Of this 10% about 8% is structural and only 2% is debt servicing
(at current low interest rates).
There is so much mandatory spending in the Federal budget
that the deficit is huge and nearly impossible to fix.
Krugman is only modeling the 2% of GDP problem and ignoring the 8% of GDP problem.
If there was no structural deficit problem
then the current debt level would be sustainable.
If he modeled the full deficit then he would show
the US is dangerously close to hyperinflation.

Debt and Deficit Unsustainable

Between what government bonds come due and the new deficit the government
needs to sell about $5 trillion in bonds in 2010. Just how big is this number?
Well, the total gross income for Hollywood in 2009 was $10 billion. The total
for "Cash for Clunkers" was $3 billion.
The total estimated GNP for China is
about $7 trillion.
That is not China's profit, but total production or sales.
So the total production of over 1 billion people in China is about enough
to cover 1 year of US government debt sales.

The
market cap for the whole US stock market
is about $15 trillion.
So a US government deficit of $1.5 trillion
per year is like having to borrow enough money to buy all
US public companies every 10 years.

America's Suez Moment

When the British, French, and Israelis attacked in the
1957 Suez Crisis
America was able to put financial pressure on Britain. It held
many British bonds and threatened to start selling them if the
British did not stop the attack. From the Wikipedia article:

"Britain's then Chancellor of the Exchequer, Harold Macmillan,
advised his Prime Minister Anthony Eden that the United States was
fully prepared to carry out this threat. He also warned his Prime Minister
that Britain's foreign exchange reserves simply could not sustain
a devaluation of the pound that would come after the United States'
actions; and that within weeks of such a move, the country would be
unable to import the food and energy supplies needed simply to
sustain the population on the islands."

Some say this marked the end of the British imperial power and
the start of America as a "superpower".
The
GNP of America at about $14 trillion
is about double that of
China's GNP of around $7 trillion.
However, if the exchange rate between dollars and Yuan were to
change by more than a factor of 2 we would then measure China
as the larger economy. China has enough US bonds that if they
were to start selling them, and let the Yuan rise, the ratio
would probably change by much more than a factor of 2.
If
China threatens to sell US bonds
it can influence America.

Danger of USA Breaking Up

Just 10 years before the USSR broke up it was hardly imaginable
that it would break up. While most people now find it hard to
imagine that the USA might break up, there is enough chance that
buying 20 or 30 year bonds seems like a bad idea.

Financial crises preceded both
the American secession from the British and the Southern
secession from the USA. The current crisis has some chance
of being followed by secession of some states.
Senator Tom Coburn said that
every great republic has died over fiscal issues.

The Federal Reserve has the power to impose an inflation tax on people.
The Fed is theoretically a private company.
The people running the Fed are not elected by the voters.
Taxation without representation was one of the reasons for the first American
Revolution.

There are
growing secession movements in some states.
The states have many legitimate reasons to say the Federal Government
is in violation of the terms of agreement and terminate the
agreement.
If there comes a time when paper money from the Federal government for
unemployment, welfare, food stamps, Social Security, Medicare, etc.
is so devalued that it no longer is enough to take care of people,
then
states may decide they are better off eliminating payments
to the Federal government
and taking care of their own people.
If Texas, Alaska, and New Hampshire were
to leave, then the remaining states would have a higher debt
load per capita. So the prospects of the government paying
debts without inflation would go down, devaluing the money even more.

Alexis De Tocqueville, wrote a similar warning in
"Democracy in America" (1835):
"The American Republic will endure until the day Congress discovers
that it can bribe the public with the public's money."
The US has reached this point.

It is interesting that thousands of years ago
Plato wrote in The Republic about democracies naturally coming to an end,
"And so tyranny naturally arises out of democracy, and the most aggravated
form of tyranny and slavery out of the most extreme form of liberty?".
Democracies can vote an end to themselves, so the people can no longer
vote things back to the way they were. Plato does not discuss any
solution to this problem.

When a currency collapses people often resort to using gold or silver,
or some form of barter. When this happens "sales tax" and "income tax"
hardly exist. If person A trades some eggs for some corn from person B,
who would pay sales tax or income tax and how much?
With checks, credit cards, and big companies like Walmart there
is a paper trail so the government can enforce taxes.
If two individuals swap some eggs and corn there will be no
paper trail and no enforceable taxes.
If the currency has failed the government does not get
much by printing more of it. A government with a failed currency and little
taxes coming in will not be able to borrow money. If the government
money a tax collector gets paid with is not enough to feed his family,
he will probably leave for other work.
When a currency fails a government's very existence is at risk.
Many governments and
empires have failed as their currencies failed.

It is sometimes said that there have not been any successful secession movements
in America since the secession from the British; however, this is not exactly
correct. West Virginia seceded from Virginia,
Nevada seceded from the Utah Territory,
also Texas and California seceded from Mexico.
The civil war changed
American thinking on secession.

America's
Declaration of Independence
states,
"That to secure these rights, Governments are instituted among Men,
deriving their just powers from the consent of the governed,
That whenever any Form of Government becomes destructive of these ends,
it is the Right of the People to alter or to abolish it,[...]".
This attitude has meant that the US has supported
self determination
movements around the world.
It would be hypocrisy to forbid this inside the US,
though the idea of
Perpetual Union
from the
Articles of Confederation
seems to do so.

Government Theory

Governments Grow Till Obesity Kills Them

"The natural progress of things is for liberty to yield and government to gain ground."
-- Jefferson, Thomas
It seems the nature of governments
to grow till they are too fat and then die.
A quote from
The Rational Optimist
that explains this well:
"Empires, indeed governments generally, tend to be good things at first
and bad things the longer they last. First they improve society's
ability to flourish by providing central services and removing impediments
to trade and specialization; thus, even Genghis Khan's Pax Mongolica
lubricated Asia's overland trade by exterminating brigands along the
Silk Road. But governments gradually employ more and more ambitious
elites who capture a greater and greater share of the society's income
by interfering more and more in people's lives as they give themselves
more and more rules to enforce, until they kill the goose that lays
the golden eggs. There is a lesson for today."

This makes sense. Most of government spending is really an overhead that the productive parts
of the economy must pay for somehow (taxes, bonds, inflation). Things like courts, police,
roads, etc. are good things, but
they can be viewed as overhead costs for the economy. The more that is lost to these overheads the
less the productive parts of the economy have to invest in growth.

In the short term a government spending lots of money can make it look like things are prosperous. But this is
similar to a family looking prosperous because it has borrowed a lot of money and spent it. Short term things
look good but long term they are worse off.

Limited Government Experiments

The US founding fathers did an admirable job of trying to limit
the powers of the federal government.
The central government was reasonably limited
till the Civil War, or about one lifetime,
and so gives some reason to hope
that a better designed constitution could last several lifetimes.
When
The Union
won over
The Confederacy
America changed from
These United States into The United States.
When states no longer had the power to leave they lost independent
sovereignty.

Another admirable limited government experiment is the
Swiss Confederation
which was founded in 1291, over 700 years ago.
Most of this time the government was limited and avoided
the many wars going on around it.

Also, the
Dutch Republic,
or "Republic of the Seven United Provinces",
lasted from 1581 to 1795 or more than 200 years.
This 3rd case also had sovereign powers cooperating.

Anarchy and Snowballing Leeches

Many people who realize that governments keep getting larger think
that the answer is no government at all. The idea is that if you
have any government it will eventually grow too large, so they
logically assume it is only safe to have no government.
However, this is foolish.

If there is no government at all then the odds are you bypass
limited government and go straight to oppression. The first
guy to form a gang and start taking tribute can grow his power.
The more territory he covers
the more income he has, the more gang members he can support,
and the harder it is for anyone to resist their power.
It is a snowballing leech. Soon
the gang is really a government. Anarchy does not last.

Any territory really needs to be defended around the
perimeter. Wars are usually fought mostly on "fronts".
Since the area goes up with the square of
the width and the perimeter only linearly, the larger the leech
the better its ratio of tribute to perimeter.
So the bigger it gets the harder it is to resist.
So any small area of anarchy is also likely to be taken over by
an adjacent country with a higher concentration of military power.

Power can form from inside or be imposed from outside,
but either way, Anarchy is much less stable than a limited government.
We have examples of limited governments lasting hundreds of years.
Anarchy power vacumes are filled very fast.

A death tax of 55% means that after the government taxes a small
business and its owner all his life, when he dies the government
takes another 55% of his assets.
Now to pay this tax the kids will have to sell the
business or heavily mortgage it. Big corporations
do not die and so do not pay death taxes. So the payback
for buying a small business is longer and better for a big
corporation than another individual.
Over time the tax policy destroys small family businesses and
pushes them into the hands of large corporations.
The government is destroying
small farms and small businesses
which create most of the jobs.

If the government takes half their money when alive and another
half when they die, the government is taking around 3/4 of their
life earnings. It is like they are 3/4ths slaves. It is amazing
that so many people stay in such a situation when they could leave.

Looking at US Balance of Trade view of problem

America's ability to print money that is the world trade and reserve currency
lets them have a trade deficit year after year without end.
If international trade was paid for in gold money
the US would run out of
gold and not be able to keep up the trade deficit forever. But with
FIAT currency they never run out of money.
But a system trading paper money for huge amounts of real goods
is not going to last forever.

In America much of the borrowing is from
foreigners and indirectly new money from the Fed.
Hyperinflation comes when a bloated government can no longer borrow and has
to print money. Japan was at the mercy of their own citizens, who had a strong
tradition of saving. That the citizens did not have the money to spend
was deflationary. Saving at near 0% when real inflation is higher
is not reasonable, but traditions like saving change slowly.
After 2 decades it seems to be changing. America is at the
mercy of foreigners who can easily change
where they put their money. It will not take them 2 decades to move their
money to someplace where it makes more sense.
America is much closer to Hyperinflation now than Japan was in 1990.

The
yen has appreciated against the dollar from 360 in 1971 to 80 in 1995.
Since world trade is mostly in dollars, as the yen got stronger against
the dollar people in Japan saw prices for world commodities going down.
Basically the US has been printing dollars faster than Japan has been
printing yen. Even so there has been only tiny amounts of deflation,
nothing like when the US Ponzi-Gold standard was breaking in the Early 30s.

Today Japan, with debt over 200% of GNP and much lower savings rates
than in the past, may be closer to hyperinflation than the US.
Defaulting to non-voting foreigners can help your local economy,
you get ride of a debt burden. However, Japan owes this debt to their
own citizens, including the ones that are retiring. Defaulting to
your own retiring voters, who you need to take care of anyway,
does not provide any gain to the local economy. Defaulting to your
own voters, when you can print money, is unheard of. It won't happen.
Japan will print money and pay off these loans. As they do, the value
of the yen will fall fast, people will flee the yen, and they will
get hyperinflation.

Here is a quote from Black Swan, who posts on Mish's blog, about what is different
between the US case and the Japanese case: "Demographics and a massive
trade surplus vs a massive trade deficit come to mind.
America's 100% higher unemployment rate could also be a factor.
No immigration vs massive immigration might also be construed as a
difference, as could Japan's lack of cities like Detroit, East St. Louis,
Gary, NOLA, Camden, NJ and Bell, Ca. Other that those differences, and
Japan's lack of illiteracy and oil dependence, I can't thing of much else."

If people save 15% of their money and then loan it to the government it
controls inflation about the same as if the government had an extra
15% tax on the people. But since the US does not save at the high
rates that Japan did, they can not do the same trick.

It seems that debt over 80% of GNP and deficit over 40% of government spending
leads to hyperinflation (see Bernholz). Japan did not have such
high deficits.

Fuel rights and CO2 treaties

The rich western countries have tried to make treaties that would
more or less lock in the status quo as far as fuel usage by
regulating CO2 emissions. If a developing country can not emit
more CO2 then it could not burn more fuel. This would mean the
fuel would keep going to the existing rich countries. Keeping out
new markets for fuel reduces the demand and so keeps the prices low.
It is as if the rich countries would get fuel rights forever
for very small payments compared to the value of the fuel.

Problem with ETFs

The odds are gold and silver ETFs originators really have the
gold and silver they are supposed to and that it will not get stolen.
But there is still a potential problem.
ETFs only have the
net position of longs minus shorts at brokerages. So if 75% of the GLD
shares were shorted they might hold 1,000 tons of gold while the total for
all customers long was 4,000 tons and short was 3,000 tons.

Now if things happen orderly and gradually then the brokerage margin
requirements will be sufficient and the shorts collateral
will cover their position. But in the event of a currency crash,
and gold shooting up fast, the margin requirements might not be enough.
Imagine that over a weekend the dollar crashed and the price of gold
in dollars went up by a factor of 8. The brokers would not be able to
get enough from the shorts to cover the GLD positions, so they might
not be able to honor the GLD holders positions.

The point is that holding an ETF puts you at risk for the broker failing
in some way as well as the originator of the ETF having a problem.
But it seems only about 5% of GLD is really shorted, so it may not
currently be a big risk. Looking at short interest is a good idea though.

The following paragraph is a quote from
mises.org about
experiences with price controls during the American revolution:

George Washington's revolutionary army nearly starved to death in
the field thanks to price controls on food that were imposed by
Pennsylvania and other colonial governments. Pennsylvania specifically
imposed price controls on "those commodities needed for use by the army,"
creating disastrous shortages of everything needed by the army.
The Continental Congress wisely adopted an anti-price-control resolution
on June 4, 1778 that read: "Whereas it hath been found by experience
that limitations upon the prices of commodities are not only ineffectual
for the purpose proposed, but likewise productive of very evil
consequences--resolved, that it be recommended to the several
states to repeal or suspend all laws limiting, regulating or
restraining the Price of any Article." And, write Schuettinger and
Butler, "By the fall of 1778 the army was fairly well provided
for as a direct result of this change in policy."

Euro and Eurozone

Currently there are requirements that Eurozone members have maximum deficit to GDP
ratios. So people are claiming that Greece will be kicked out of the Eurozone and
then others also, so that will be the end of the Eurozone. They are also claiming
that you can not have a common currency without a central government. But in fact
many countries have violated the maximum limits on deficits and nobody has been
kicked out. They can and should eliminate the requirement for existing members.
They could keep the requirements for joining the Eurozone, but once in there
should be no threat of being kicked out. In that case, if/when Greece defaults
the damage is not so bad. If the European central bank is not made to
print money when countries get into trouble then the Euro is a much stronger
currency than the dollar. The Fed will have to print money if the US government
needs it, and it needs lots.
If Eurozone eliminated the requirements for existing
members and let Greece default then I think the Euro would rally as people
would know it had less danger of excess printing.

The basic plan is for the ECB
to buy up low quality Euro bonds that will probably default and
sell high quality Euro bonds.
So in order to keep from printing Euros to support the Euro, which clearly
is silly, the ECB is destroying its balance sheet to support
the Euro. This is equally silly though not as clear.
For a central bank to maintain the value of its currency
it needs to have high quality assets, or
Real Bills.
All the ECB is really doing is supporting countries that are borrowing and
spending too much at the expense of the people holding Euros.
The Euro had been increasingly used as a reserve currency, but this
trend will probably reverse now that the ECB is breaking rules
and no longer makes the Euro look like a safe bet.

Counterarguments

Most of the above really argues that paper money is causing problems and
at least for international trade it would be better to keep score with gold and silver.
When this changes the US will probably have hyperinflation.
What are the counterarguments?

Gold and silver look cheap compared to the past because they are not
monetary items any more. If they don't become monetized their
prices will go down from here.

Effectively the world is paying the US to be the worlds policeman by
using US dollars. So it is not that the other countries
are losing money on dollars, it is that they are paying for a service
that they value. Paying the protection money this way just hides it
from the common man.

By this 38 year cycle the trouble was in 2009 and we are through.
So nothing more to worry about.

The 38 year cycle is just too exact to be believable. Real trends
involving humans should not be so precisely timed.

Some of the fat in government is due to public unions. The unions have
pressured the politicians to where government jobs pay much more than
private jobs. As things get desperate, it should be possible to cut
government expenses by cutting the salaries of public employees.

But what I am predicting here is hyperinflation of the US dollar.
Hyperinflation is something that has happened many times around the world
with paper money.
It has even happened
twice in America's history.
Real hyperinflation (where inflation rates are reported for less than year time periods)
only happens with un-backed paper money. The US has only had around 50 years of
experience with un-backed paper money. With 2 hyperinflation periods
starting during these years, we can estimate an average chance of starting
hyperinflation when on un-backed paper money in America of
about 4% per year. I think it is safe to say that the
US economy is more messed up than on average and the risk of hyperinflation
is higher now than this average.
While I don't think we can be certain that hyperinflation is coming,
it seems like a high enough probability that people should take it into consideration.
Certainly investing in a 30 US bond with a 4% rate seems very foolish.

Looking at other cases of hyperinflation it does not seem to
cause a breakdown in civilization or apocalyptic situation.
There can be some increase in crime, particularly if people had
been depending on the government for support. But in other
hyperinflation cases it was relatively easy for people to use
some other currency. People in Argentina and Zimbabwe could use
US dollars when their local currency was failing.

If paper money
everywhere is failing then this is extra difficult.
Also, this will be the first time that
the international trading and reserve currency fails.
And
hyperinflation could be particularly bad on modern big cities.
So this hyperinflation is probably worse than the typical one.
I do think there is a chance that the US Federal government
either falls away, or is greatly reduced in size (like half
the share of the GNP it currently is). But I don't think
US state or local governments are at risk of failing entirely.

Potential Triggering Events

The dollar and US bonds are like a bubble that is ready to pop.
Panic selling could start at any time.
So the big question is, when will the fertilizer hit the ventilator?
Here are some potential events that might trigger the start of the dollar's fall:

It might become clear that the US dollar was losing its role
as key reserve currency, maybe to gold.

Price inflation may start. This could scare people out of the dollar.

One or more countries that currently peg their currency to the dollar
could decouple from the dollar.

The Fed might raise interest rates. This would cause government interest
payments to become a bigger fraction of GNP. It would also
increase the number of private loan defaults, probably leading to
more government printing of money to bail out banks.

US might pass new legislation reducing the prospects for American economy.

US might raise tax rates but not get any more money as rich spend more
time avoiding taxes and less earning money.

How to prepare if high inflation is coming

This information is education in nature and, therefore, is not
intended to constitute investment advice and should not be interpreted
as a recommendation to purchase, sell or hold a particular security.
Prior to making any investment decision, the services of an
appropriate professional should be sought as investment related
recommendations are dependent upon the personal situation of
each individual investor.

But if things play out the way it looks to me, then doing
some of the following ahead of time might ease the pain:

If you have a variable rate mortgage in US dollars you should
switch to fixed rate ASAP. As inflation hits and interest rates
go up, the odds are overwhelming that variable rate mortgage payments
will go up faster than salaries. You don't want to have that risk.

More than
10% of the people with mortgages in America owe 25% more than their house is currently worth.
If you have a fixed rate mortgage and are "upside down" in
your home equity, it may still be sensible not to walk away.
As the dollar drops so does the real value of your mortgage. If the
dollar drops to 1/2 the current value, it is sort of like 1/2
of your mortgage just went away. Over the next decades dollars
could drop more than this. So you could easily make enough
on the mortgage to make up for lots of negative home equity now.
The other way to look at it is that as inflation drives up rents
your fixed monthly mortgage could well be less than rent after a
few years.

Invest in silver and gold. If the world loses faith in paper money
there will be a huge demand for silver and gold. Even without a
general failing of paper money, silver and gold should do very well
as the dollar goes down.
To
paraphrase Mogambo,
when the idiots both at the European Central Bank
and the US Federal Reserve are panicking and pushing the big
red buttons marked "Print Another Trillion" you don't need to
do any math, just own gold.

Investing outside the USA. You want a country that respects
Rule of Law
so your investment won't be arbitrarily messed with.
Company values should be rising in countries
trending toward free markets and falling in ones
moving toward more government (as in USA).
The more a country's central banks is artificially holding down
interest rates, the more it
discourages savings and encourages risky investments,
which leads to bubbles and busts. In a free market the majority
of the population should just save their money, not gamble.

Electric car. If you have solar you can charge it up. Gas prices
don't trouble you.

It might be good to switch jobs to, or start a side business in,
some field that will be in demand during hard times. If you are in a
field that needs consumers with "discretionary spending" you
might want to switch now to something that will not be cut
even in hard times. Farming jobs are safer than
high end service jobs.

You might be tempted to short treasuries, or wondering why the whole world is
not shorting treasuries. The value of a 30 year bond at a fixed 4% will
go to near zero after we get hyperinflation, so shorting these might seem logical.
But it is not. The problem is that you are putting up good money and
if you win your winnings are in worthless money. I think part of why
treasuries are doing so well is that shorting them no longer works.

When the very money that contracts and commerce depend on becomes unreliable or
unusable, then self sufficiency becomes more
advantageous than under normal circumstances.
With inflation the prices or supply of food,
water, and electricity could become crazy.
In their attempts to balance the various government budgets,
income taxes and sales taxes could go crazy.
If things get crazy, all kinds of
For Want of a Nail
problems can happen in a
Just In Time
economy with big troubles.
The more self sufficient you, or your community, can be
the less such problems will impact you.

Gold.AI

Feedback and Blog

This is a work in progress. I keep reading and thinking about what is going
on. As I find something new that I think is interesting I put it in here. If you
find errors or something missing I would like to know. I have a
blog at howfiatdies.blogspot.com.
My email is vince cate (together no space) at gmail dot you know what.